Typically after recovering from bankruptcy people ask me how long it will take to qualify for a mortgage loan or how long after a bankruptcy to buy a home. Banks and mortgage lenders understand that it is normal for good people to go through financial hardships and that’s why they extend credit opportunities with new mortgage programs after a bankruptcy.
Take advantage of aggressive mortgage programs that help people buy a home after a bankruptcy.
In the last 10 years, the American dream of buying your own home turned into a nightmare for too many of us. During the housing crunch, more than seven million homes were foreclosed upon, and many Americans ended up in bankruptcy.
There are many misconceptions in the public about bankruptcy. One of the biggest is that you cannot buy a home for at least seven years after you have declared chapter 7 or chapter 13 bankruptcy. This is not the case at all. It is possible to get a mortgage after a bankruptcy if you know where to look.
The most likely reason that this myth persists is that generally, a bankruptcy public record will stay on your credit report for up to seven years. This does not mean that you cannot buy a home again within those seven years.
If you want to buy a home and you recently declared bankruptcy, we would like to offer you these tips and ideas:
As noted above, a bankruptcy can stay on your credit report for up to seven years. This rarely means you are unable to buy a house again fairly soon. Some mortgage lenders are able to approve a client for a new mortgage after bankruptcy as soon as a month.
However, that is more the exception than the rule. Many lenders will be understandably wary of you with a very recent bankruptcy.
After you bankruptcy is discharged, it is a smart idea to wait at least a year until the dust has settled on your financial situation. The smartest thing you can do during this period is to pay all of your bills and rent on time. When you apply for a home loan after a bankruptcy, the lender will see the Chapter 7, 11 or 13 reported by the U.S. District Court. But if you have shown for the last year or two that you are back on your feet financially, they may approve your mortgage after a bankruptcy. Even first time home buyers may be able to get qualified to buy a house after a bankruptcy is discharged.
Also note that even with a recent bankruptcy, there are some credit card companies that may approve you for a credit card. Some recently bankrupt clients report that they were still able to be approved for a $500 credit limit Mastercard or Visa. Others may only be able to get a secured credit card, but this can still be used to build your credit.
#2 Save Money
With a recent bankruptcy, you will want to show potential lenders that you have money saved up to put down on a house. You do not necessarily have to put down 20% – that is another myth out there – but the more you have, the easier time you will have getting a mortgage after a bankruptcy.
The Federal Housing Administration or FHA offers 3.5% down payment home loans for people who have at least a 620 FICO score. If your score is lower than that, you would likely need to put down up to 10%. One of the most popular programs we hear about is for an FHA loan after a bankruptcy was discharged 24 months.
If you can show that you have skin in the game, it is more likely that a lender will view your file favorably and give you a mortgage.
Another plus of FHA mortgages with low credit scores is that if you are approved by a lender, the interest rate will often be lower than standard market rates. Buying a house with bad credit scores is always challenging so it’s very important that you get advice from financial companies that have access to mortgage programs, like the FHA.
#3 Shop for a Mortgage
One of the biggest mistakes that many potential home buyers make is to not shop around for a mortgage. This is very important always, but is especially important when you are coming out a bankruptcy. Many subprime mortgage lenders will not want to work with you, but a few companies still may. You have to shop around and find a company that offers reasonably priced mortgage for people with bad credit.
#4 Check Your Credit Report
You can improve your credit more quickly by getting a copy of your credit report. Be sure that everything is accurate. You will have filings on your credit report about debts that were discharged in your bankruptcy. You want to make certain that nothing that was discharged in the bankruptcy is still showing a due balance. This has been known to happen. Most bankruptcies involve a large number of credit accounts. It is possible for something to slip through the cracks.
#5 Try to Get a Car Loan
A great way to rebuild credit is to get an installment loan, which is most often a car loan. You will have to get a car loan with a higher interest rate, but that is ok. We recommend that you get an inexpensive car and make regular payments on the loan for at least a year.
Those regular payments will raise you score, and will shore a mortgage lender that you are a good risk again.
The Bottom Line
It is very much possible to get a mortgage after you have declared bankruptcy. We recommend however that you wait for a while and show that you have reestablished yourself financially. If you wait at least one or two years, you will be able to qualify for a better interest rate.
For example, if a person was approved for a loan for a $200,000 house at 30 years and fixed interest at 4.5%, you would pay $1,013 per month. If you get that same loan with a 4% interest rate, you would pay only $954 per month. That does not sound like a lot of difference, but over the life of the loan, it’s close to $20,000.
By following the above tips, you will be able to qualify with financing to buy a home after a bankruptcy much sooner than most people realize, and stop paying rent.